Wonkette Learns About the Balance Sheet Recession
Department of "Huh?!"

Why Oh Why Can't We Have a Better Press Corps? Peevish in the Morning Edition

This is, I think, a relatively good case to focus on when one thinks about the deficiencies of the U.S. press corps. When William Galston's article hit their desk, a normal editor would have googled "balance sheet recession" and then asked: "Hey, Galston, you say that this is a theory from Amir Sufi. But Sufi's name is always paired with his coauthor Atif Mian on this. You say that this is a new theory. But there are 4.6 million hits. How can a new theory be so widely distributed already? You say that this is an alternative to the Keynesian story. But all these Keynesians are talking about it as a piece of their story. How come? And shouldn't Richard Koo's name be in this article somewhere?"

But this is modern American journalism. This is the New Republic.

Paul Krugman is especially peevish this morning:

This Morning In Peevishness: William Galston writes, “What if the Right and the Left Are Both Wrong About Why the Economic Recovery Is So Slow? A New Theory.” And the new theory is that it’s all about household balance sheets. Gosh, why didn’t I think of that?... [I]f you’re going to write a whole article about what those foolish liberal economists haven’t considered, maybe, maybe, you should check to see what they’ve actually written...

He has been peevish about Galston in the past:

Pre-refuting William Galston: when Galston writes, "Until someone refutes Reinhardt and Rogoff, our operating presumption must be that excessive debt accumulation will eventually reduce economic growth", I sort of wonder at the absence of a link to my blog post in which I, well, refuted Reinhart and Rogoff.... [I]f you’re going to cite me in the title of an article, and accuse me of not having an answer to what someone else wrote, shouldn’t you do a search to see whether I have, in fact, said anything about it?...

Indeed. William Galston:

What If The Right And The Left Are Both Wrong About Why The Economic Recovery Is So Slow? A New Theory: Movement conservatives argue that the weight of a government that “spends too much, taxes too much, and borrows too much” is suffocating the private sector.... Keynesian liberals... counter that the problem is the collapse of demand.... What if they’re both wrong? That’s the claim of Amir Sufi... [who] argues: “The main factor responsible for both the severity of the recession and the subsequent weakness of the economic recovery is the deplorable weakness of the U.S. household balance sheet,” which is, Sufi shows, “in worse condition than at any other point in history since the Great Depression.”

The top of a google search for "'balance sheet recession'" says that there are "about 4,630,000 results."

The first hit is Richard Koo's book, called Balance Sheet Recession: Japan's Struggle with Uncharted Economics and its Global Implications. The second hit is Paul Krugman talking about monetary policy in a balance sheet recession like the one that the U.S. is now in.

I find myself at the bottom of the first results page, quoting Mark Thoma on how the reason that the stimulus was insufficient was that we were in a bad balance sheet recession.

The balance sheet recession argument is a sub-class of the Keynesian liberal argument, not an alternative to it.

And the usual citation isn't "Amir Sufi", it is "Atif Mian and Amir Sufi (2010), 'Household Leverage and the Recession of 2007 to 2009', IMF Economic Review".

And the theory is not new. Among the predecessors that Atif Mian and Amir Sufi explicitly cite are Barry Eichengreen and Kris Mitchener (2003), Irving Fisher (1933), Mervyn King (1994), Ric Mishkin (1978) and Marty Olney (1999).

Galston continues:

THE DATA seem to support Professor Sufi’s thesis, and, if Robert Hall’s Presidential Address to the 2011 meeting of the American Economics Association—which focuses on the housing collapse and the impact of high household commitments to debt service, as well as rigidities in financial instruments and policies—is any indication, academic economists are beginning to pay attention. (Hall cites Sufi’s work.)...

Beginning to pay attention? AEA President Robert Hall is not just "beginning" to pay attention--I remember him making useful comments on Larry Summers's and my paper on this back in 1984. Irving Fisher wrote about this in 1933. Mervyn King, now Governor of the Bank of England, wrote about this in 1994. Ex Fed Governor Ric Mishkin wrote about it in 1978.